• The firm momentum in oil prices in recent weeks driven by tightness in oil market and elevated inflationary pressures have pushed the oil curve into deep ‘backwardation’, a state when spot prices are higher than forward prices.
• Interestingly, even though analysts have argued that forward prices have been a terrible predictor of future spot prices, the shape of the forward curve (i.e. contango/backwardation) is actually much more indicative of where future spot prices are going to be.
• According to a study from Michael Kao (PM at Akanthos Capital Management), there has been 11 cases where the forward curve shifted from contango to backwardation, and in 7 cases it resulted in higher spot prices one year later.
• The four other cases where oil spot prices were lower were due to unexpected exogenous circumstances (i.e. end of Gulf War in 1991, Russian crisis in 1998, GFC...).
• Are oil prices about to hit news highs in the coming months?
• ST resistance to watch on the WTI front month futures stands at 95.80 (Feb 14 high), followed by the psychological 100 level, which corresponds to July 2014 (before the plunge in oil prices in H2 2014).
• On the downside, first support to watch stands at 90, followed by 88.40.

Source: Bloomberg/MNI